Wealth Management

Utah Business Staff

October 1, 2011

As far as the areas that we like—we like convertible stocks, preferred stocks. Once we see some stabilization here, things look really good to us on the emerging market side as far as the best opportunities going forward. We’ve been negative on bonds ever since we started to come out of the recession a year ago. But with the federal reserve basically saying they are going to keep rates low until 2013, that gives you a little bit more room on the bonds to go a little bit longer, not terribly, but seven to 10 years versus where we were completely under three years prior to that.

My concern with the risk tolerance is that it’s a moving target. How do you handle changing risk tolerances?

YOUNG: You have to walk [clients] through that process and be up front. If you’ve got a million dollars, are you OK with your account going down $100,000? If you are OK with that, are you OK with it going down $200,000 or $300,000? $400,000?

In absolute terms, we are investing their money. You should be outlining what the risks and reward potentials are at different levels. Usually what I’ll do is go through that whole process, try to understand what their risk level is. For a lot of people, they will be close but for some people who are more aggressive, they will think their risk tolerance is higher than it really is, and with those people, usually you are pushing them back a little bit.

For example, we had a large client the other day who wanted to be more aggressive, wanted to get a lot more involved with the market, but I know from dealing with them that it wouldn’t work. So I’m personally going to take them a little bit more aggressive, but I know a year from now when it’s gone down more than they anticipated, it will be my fault, not theirs.

NEWTON: We had Black Friday in ‘87, we had October ‘91. These things are cyclical, normal, ordinary, and they change from time to time. In fact, the one thing you can count on is change, and that’s what keeps us employed as financial advisors.

Regarding bonds, you can go either way. Some people are doing the buy-and-hold strategy, and that is not necessarily a bad thing. For those people who are trying to do a more strategic asset allocation and want their advisors to move them into bonds and then back into the market, that’s not a bad thing either. There are some different ways to get there, and ultimately, you won’t know whether you picked the best way until you get there.

But too many people think that age 65, when they are retiring, is getting there. I’m always telling my clients, “Wait, your life expectancy is in the 80s now, and so you have to go longer term than that.”

And then it’s a matter of risk tolerance. You can sit down with them upfront and talk to them about their risk tolerance, but it’s going to change when the market goes down 6 percent in a week.

As everyone here knows, there’s only about five or six days in the market that make up anywhere from 50 percent to two-thirds of the return of the market in the year. So it is a matter of a longer-term strategy, and financial advisors can help clients who are not used to seeing this on a day-to-day basis understand. You are going to always have these ups and downs in the market, sometimes more volatile than others.

HOLMGREN: It’s dangerous sometimes to make a rash decision. Sometimes we need to be aware of what’s happening on a day-to-day basis, but we forget that we are making progress towards those goals.

Sometimes clients will say, “I’ll meet with you when things come back.” No, this is a time we need to meet now because there’s always some opportunities. If you are properly diversified, you will always have someplace that you can make money while the other things are recovering.

BAPIS: Unless we are going to fall off of a cliff, which I don’t think we are, there are some tremendous values out there, and the two most important things we can do as financial advisors are educate our clients and communicate with them.

In our equity portfolios, we’re pretty highly into dividend-paying stocks because they add a little bit of stability if there is volatility in the price of the stock. For our older clients, we’ve got some of them in bond ladders that vary between three and five years. We’re avoiding commodities. We’re avoiding high-yield. We’re avoiding the loan-type fixed income mainly because everybody is rushing into them, and one of the things I’ve learned over the years is if I could do the opposite of what the masses are doing, then maybe I’ve got a chance.

JEFFERIES: Constant communication is key. If you are constantly having that communication with your clients, it holds them somewhat accountable. If they are saying every month, “Yes, I can handle this level of risk,” I think that would make them less likely to change that allocation during down periods like this.